Brief History

In July of 2015 the Wage and Hour division of the USDOL published proposed regulatory changes over the definition of who could or could not be an exempt employee. An exempt employee is by definition an employee who is exempt from being paid overtime. That means that an exempt employee can work as many hours as is necessary without earning any more money other than their stated salary. In the proposed regulation the figure that was stated was going to be $970 per week, or $50,440, since it was to be indexed at the 40% of the weekly earnings of all salaried employees in the United States. That level shook a great deal of people up since the current level is $455 per week of $23,660. There were also rumors that the duties test was going to be changed and made more stringent. The duties test is what you look at to determine if someone is meeting the work standards it takes to be an exempt employee.

What Actually Occurred?

This is the good news part of this post. This new regulation only affects the Executive, Administrative and Professional exemptions. The new level to qualify to be an exempt employee is $913 per week or $47,476 per year which is better than $50,440. They ended up basing this on wages in the South.

Unexpectedly they announced it will not be adjusted annually, as originally anticipated, but every three years, though this could be problematic, as I will discuss later. The new regulation does allow you to count bonuses and commissions, for up to 10%, to go toward meeting the threshold if these bonuses are paid at least on a quarterly basis.

More good news came with the announcement that NO change is being made in the “duties” test. We are not going to be forced to go to the California model of percent of time spent performing duties.

Even better news was that the effective date on this does not occur until December 1, 2016 as opposed to the July 2016 date that was expected by many. Everyone will have ample time to prepare for the necessary changes.

The Bad News

The bad news is that this change will still have the following impacts:

Companies are going to have to pay more money to many of their employees

Small business, the restaurant business, and non-profits are going to feel the impact much more than big business

Companies are going to have to change many employees to non-exempt status and as a result require them to track time

There will be a cultural disruption for many companies as employees have their status “lowered” to non-exempt

The three year indexing could lead to massive jumps in the salary level, with it reaching $55,168 by 2023 and almost $60,000 by 2026, though some economic studies estimate it could actually be closer to $70,000

The exemption level for highly-compensated employees has risen to $134,004 much higher than the proposed $122,100 level

There are NO EXCEPTIONS for part-time employees. Pro rata amounts are not considered. Anyone you want to be exempt must be making $913 per week

There are NO EXCEPTIONS for non-profits, colleges, universities or public entities.

What Needs to Be Done

First, this would be a good time to review whether or not people you have classified as exempt are really exempt. Too many employers make the mistake of improperly classifying employees as exempt solely on the basis of the fact that they pay them a salary. Salary is a method of wage payment not a classification of overtime eligibility. There are numerous companies that have people classified as non-exempt yet they pay them a salary. Non-exempt employees do not have to be exclusively hourly employees. So even if you have an employee who is going to make the $47,476 salary level they may not be properly classified based on the nature of the duties required to be classified as exempt. This is not as easy as saying “they make decisions” as one writer claimed.

By the way, titles don’t count. It is all based on the job description and the actual duties performed. If you have not updated your job descriptions lately then you may want to do so by having an incumbent participate in the process.

Here are the preparation steps that need to occur:

Identify all current employees that are classified as exempt (not currently eligible for overtime) that are making less than $47,476 per year

Determine how close these employees are to that threshold level

Determine how many potential overtime hours that employee worked in the past year

Calculate the cost of that overtime based on time and a half calculations

Determine if it is more cost effective to increase the employee to the $47,476 level or to pay the calculated or anticipated overtime

For those employees where it does not make economic sense to raise them to $47,476 it will become necessary for you to determine how you will actually record their time worked, because once these employees are declared non-exempt employees (eligible for overtime) you will have to ACCURATELY track their ACTUAL time worked

You will need to institute a system of checks and balances to insure that the behavioral change of tracking time has actually occurred

You will have to determine how you will pay overtime. There are several methods that go beyond the scope of this post

Realize that by raising the salary of some as compliance may have an effect on the rest of your compensation structure, such as pay compression issues

Tracking time accurately of newly re-classified employees will also be important. You can do it old school using paper time sheets or you can do it using new technology, even including mobile devices. The important consideration is finding something your employees will adapt to most easily.

Potential Legal Problems

As you can imagine plaintiff’s attorneys’ eyes have lighted up with dollar signs. Because this has so widely been publicized you may have problems with, according to Seyfarth Shaw:

Exempt employees who think their pay should be increased when it was not

Exempt employees who get an increase but think they should be non-exempt in order to become overtime eligible

Reclassified employees who question why they were not classified as non-exempt, and paid overtime, all along

You need to have a plan on this is going to be done. Additionally you need to have an education agenda. It needs to include upper management and line management since their employees may be seeking information from them.

Going Forward

It is unlikely this will be overturned even if a new administration comes in place in January. Congressional reversals this year would have to be signed by the President and that is NOT happening. Perhaps future Congresses or Administrations may alter the updates done every three years, but that remains to be seen.

So prepare to make the appropriate changes and plan on the economic impact it may have for your organization. DO NOT SIT ON YOUR HEELS.

Michael (Mike) D. Haberman, SPHR is a consultant, speaker, writer of HR Observations, and co-founder of Omega HR Solutions, Inc. After over 30 years in HR he got tired of the past and focuses here on the Future of HR. Connect with Mike.